If you've been living under a rock for the past few months, you may not know the country is in one of the worst recessions since the Great Depression, that the financial sector is rapidly being nationalized and that the stock market is down about 40% over the last year. If you've turned on the TV recently, the reports would have you believe that the financial Armageddon has arrived - and apparently the markets believe it.
Recently, U.S. Treasury yields went negative. U.S. Treasuries are considered the safest investment and are virtually "risk-free." Usually their yields are very small, but for them to go negative is astounding. Investors are so scared of the market, they would rather have a guaranteed loss that they can foresee than invest in companies or even bonds.
Is the market really in that bad of shape? Will it ever go back up? No, the market is not as bad as everyone thinks. Perhaps some financial companies are, but there are many companies whose stocks have been beaten down that don't deserve it.
And will the stock market recover? Of course! I plan on being fully invested when it happens, and you should too.
Right now is probably the best time to invest in your life. After a recession, the stock market usually returns to its pre-recession levels within a year. If that holds true for this market, we're in for a 40% gain this year, possibly spilling over into next year.
That's an amazing gain, considering since 1965 the S&P 500 has only averaged 10.3% per year. According to an academic study done by Martin and Puthenpurackal, Warren Buffet has beaten the market 27 out of the last 31 years, on average beating the market by 11.14%. Warren Buffet, the Oracle from Omaha, has long been regarded as the best investor of all time. His returns are nothing short of amazing.
What does Warren Buffet have to say about the recent plummet in the stock market? In his Oct. 16 article "Buy American, I am." Warren Buffet announced "Now is the time to buy U.S. stocks." He had previously had his entire personal portfolio in U.S. Treasuries (risk-free) but said that he believed U.S. stocks were now the best investment.
There are some stocks out there that are massively undervalued. The trick is finding them.
So what can you do if you know nothing about stocks or finance? I would recommend a few things:
1. Start reading the Wall Street Journal or at least the business section of most newspapers. It is a good way to stay up-to-date on the economy and world events. You don't have to read the entire paper, but it's helpful to just scan all the headlines, and then read one or two of the articles that interest you.
2. Make friends with people who are interested in investing. A good place to start would be FMSA, the Financial Management Student Association, here on campus. Or you could ask your own friends; you might be surprised to find one of them is interested in stocks.
3. Do your own research. Don't buy penny stocks, take tips from e-mails or blindly follow CNBC's Jim Cramer, although listening to the principles Cramer teaches would be a good idea. A good way to find companies to buy is to look at what you buy on a daily basis: McDonald's, Coke, Budweiser? Each of these products are from companies that have performed very well over the years. A great investment idea may be sitting around in your room.
4. Don't panic. The market will be volatile, especially for the upcoming months. But hold on and don't sell, even if the stock goes down. It will likely go up in the long run. Warren Buffet recently invested $3 billion in General Electric at $25 per share, and it's now trading under $14 per share. Did Buffet panic and sell? No. He invested even more when it hit $15 per share. Buffet considered GE a great buy at $25, so if it's $15, it's a steal!
You won't become a stock expert overnight. The potential for awesome returns is out there waiting to be found - you just have to work at it. If you teach yourself to invest now, you'll have skills that will pay off throughout your entire life.
Think about it: you spend a few hours a week on classes like art history and fitness walking, so why not spend an hour a week learning about investing? Do yourself a favor and browse the Wall Street Journal once in a while, watch some "Mad Money" and attend an FMSA meeting.
Oh, and take some economics and finance classes. I promise they'll be worth your while.
Derek Wilson is a junior economics and finance major and writes 'Making Cents' for the Daily News. His views do not necessarily agree with those of the newspaper.
Write to Derek at dawilson2@bsu.edu
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